Higher margins on pepper may go

In the wake of volatility in the pepper futures market, the National Commodity and Derivatives Exchange of India Ltd (NCDEX) and the Multi Commodity Exchange of India Ltd (MCX) had raised the margin to 25% of the amount when a trader buys pepper and 20% when he sells, from a flat rate of 11% and 9.5%, respectively. This was done on FMC instructions, which several members in the trade had opposed.

With pepper prices rising and exports bound to go up in the wake of a global supply crunch, there is the latest order of the exchanges, again on FMC instructions as part of its bid to curb fluctuations, to reduce the open position from 15 June for the next month’s contract (July) to 1,500 tonnes for members and 500 tonnes for every client from the present level of 3,000 tonnes and 1,000 tonnes respectively.

Decision soon: The regulator will look into the deliveries that have taken place over the last few months and based on this, would consider a relook at the higher margins and lower open positions in pepper.

The move could hamper genuine trade in the commodity and also put a check on deliveries since traders would be forced to shift their positions to other months’ contracts when they cross the limit. This could badly affect the trade, especially exports, said trade sources. Anupam Mishra and Rajiv Agarwal, directors of FMC who were here in connection with the awareness programme organized by NCDEX, said the regulator would look into the deliveries that have taken place over the last few months and based on this, would consider a relook at the higher margins and lower open positions in pepper. It would have to determine whether the rise in price, now ruling over Rs160 a kg for some of the contracts, was based on strong fundamentals or mere speculation, on which basis a decision would be taken soon.

The Spices Board, the government’s trade promotion body, had recently announced that during the last fiscal, total pepper exports from the country reached 28,750 tonnes, valued at Rs306.2 crore. The unit value had gone up to Rs106.50 per kg. In the wake of tight global supply with production estimated to be 2.66 lakh tonnes in 2007—down from 2.7 lakh tonnes the previous year—prices as well as Indian pepper exports were bound to go up, both the board and trade body All-India Spice Exporters Forum felt. Forum chairperson Sushma Srikandath said export enquiries for Indian pepper were coming in and shipments were expected to happen soon.

C.P. Krishnan of broking house Geojit Financial Services and Giby Mathew of another Kochi-based firm, JRG Commodities, said most farmers, exporters, cooperative societies, hedgers and members had delivered more than the proposed near-month limits.

The proposed regulatory measures would certainly reduce the delivery participation which ultimately could lead to price rigging and manipulation. The present rules would only drive away small investors and growers as they would not be able to afford higher margins, they said.

There was growing export demand and hedgers and exporters with genuine export contracts and long positions at exchanges—or purchases made in anticipation of a higher price at a later date—needed to be exempted from all such additional margins and position limits, they added.

FMC was also looking at suggestions from different quarters like margin slabs for clients where at the lower end, there would be the normal margin, which could go up on the basis of higher positions.

S. Kannan, of Kotak Commodity Services Ltd, said prices had gone up in the wake of reports of a 20% shortage in the global market, coupled with a poor domestic crop. NCDEX volumes had increased in March (11.97%) and April (82.21%) as prices had been rising consistently, following good fundamentals. However, the position limits and increase in margins during April had drastically reduced the trading volume, with May registering a fall of 56.57% compared with the April trade.

“The positions and margins controls are a part of risk management system that any exchange has to comply with when faced with a prolonged period of high volatility. The 10-day volatility in black pepper had shot up to 57.44% during April and it was no surprise that exchanges raised the margin requirements," Kannan added. “After falling back to 18.6% on 14 May 2007, volatility of black pepper is again on the rise. Currently, it is 33.08%. Although the figure shows that high margins amid position limits have dried down volumes, a dynamic monitoring of price swings is a must and margins should be brought down only at times of lower volatilities. Although the price rise is genuine given the positive fundamentals, dynamic margin controls are a must as a part of effective risk management control," Kannan said.

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